TEXT-Fitch cuts TCF Financial IDR to 'BBB'

Reuters Staff

6 Min Read

Oct 26 - Fitch Ratings has downgraded the long-term Issuer Default Ratings
(IDRs) for TCF Financial Corporation (TCB) and its principal banking
subsidiary TCF National Bank to 'BBB' from 'BBB+'. The Rating Outlook remains
Negative. A full list of ratings is provided at the end of this release.
Today's rating action is reflective of TCB's continued asset quality
deterioration. Non-performing assets (NPAs), inclusive of troubled debt
restructurings (TDRs) increased $192 million to $1.15 billion at third quarter
2012 (3Q'12) totaled and represented 7.5% of total loans and real estate owned
(REO). This represents a sizeable increase from a year ago when NPAs stood at
$959 million and 6.7%, respectively. Similarly, net charge-offs and provisions
spiked in 3Q'12 (2.74% annualized) relative to recent quarters.
The most recent increase in 3Q'12 NPAs were driven by OCC guidance related to
performing consumer loans discharged from Chapter 7 bankruptcy. This new
guidance requires lenders to charge off loans to the fair value of the
underlying collateral in circumstances when a borrower's debts have been
discharged in bankruptcy and the borrower has not reaffirmed the debt. This
action needs to be taken regardless of payment status. Even setting aside this
guidance, Fitch calculated NPAs for TCF have increased in each of the last five
quarters and have shown few signs of abating.
The application of the new guidance resulted in $43 million and $32 million of
incremental charge-offs and provisioning, respectively. This also resulted in
$103 million of accruing TDRs being placed on non-accrual status. Fitch
recognizes that the loans charged off as a result of the OCC guidance will
likely have a higher recovery rate than other loans that have been charged off
but the majority of the charge-offs are not anticipated to be recovered. Fitch
further notes TCB's considerable level of consumer loan balances in bankruptcy
court ($94 million in 2Q'12) that could result in additional charge-offs in
coming quarters as a result of the OCC guidance.
Regardless of the 3Q'12 charge-offs, TCB's ratings had a Negative Rating Outlook
due to relatively poor asset quality measures, but more importantly, due to
TCB's strategy shift a year ago which emphasizes a national lending platform of
indirect prime and non-prime auto and inventory finance. This stands in contrast
to TCB's historical focus of traditional consumer and commercial lending within
its geographic footprint.
Loan growth within these loan categories has been robust and Fitch views this
growth with caution as the underlying loans have not had time to fully season.
Fitch will continue to view TCB's growing proportion of national lending
products as a less proven, and, therefore, riskier operating strategy until loan
growth slows and the underlying portfolio proves, over time, to be of high
credit quality
This rating action comes on the heels of TCB's recent balance sheet optimization
initiative whereby TCB prepaid several long-term FHLB facilities while absorbing
significant pre-payment penalties. Fitch viewed the initiative as credit neutral
as the positive impacts of lower asset sensitivity and greater forward earnings
power were offset by lower levels of tangible common equity in the near term.
The Outlook for TCB's ratings remains Negative as trends in asset quality remain
at odds with peer institutions that are largely experiencing significant
improvements in the levels of NPAs, net charge-offs (NCOs) and provisioning
while TCB's trends remain negative. Fitch notes that the Outlook horizon,
typically 12-18 months, may be shorter in this instance if current asset quality
trends do not show sustained improvement.
Rating Drivers and Sensitivities
If asset quality trends begin to show clear and consistent positive trajectory
while earnings normalize at levels consistent with similarly rated institutions,
the Outlook could be revised to Stable. In the long term, if the newer national
lending products season and show solid credit performance through the cycle,
ratings could be affected positively . Conversely, TCF's ratings are sensitive
to asset quality trends, which, if they remain volatile and negative, could
result in a further downgrade of TCF's ratings.
TCB is an $18.9 billion bank holding company with operations in Minnesota,
Illinois, Wisconsin, Michigan, Indiana, Colorado, Arizona, and South Dakota.
Fitch has downgraded the following ratings:
TCF Financial Corporation
--Long-term IDR to 'BBB' from 'BBB+';
--Viability to 'bbb' from 'bbb+';
--Preferred stock to 'B+' from 'BB-'.
TCF National Bank
--Long-term IDR to 'BBB' from 'BBB+';
--Viability to 'bbb' from 'bbb+';
--Subordinated debt to 'BBB-' from 'BBB';
--Long-term deposits to 'BBB+' from 'A-'.
Fitch has affirmed the following ratings:
TCF Financial Corporation
--Support at '5';
--Short-term IDR at 'F2';
--Support floor at 'NF'.
TCF National Bank
--Support at '5'
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Support floor at 'NF'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Risk Radar' (Oct. 15, 2012);
--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011);
--'New Accounting Guidelines Could Push Up Q3 U.S. Bank TDRs' (Oct. 12, 2012;
-- 'Troubled Debt Restructurings' (Dec. 9, 2011);
-- 'Troubled Debt Restructurings' (May 16, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Risk Radar October 2012
Rating Bank Regulatory Capital and Similar Securities
Troubled Debt Restructurings (Accounting Standards Update Set to Increase TDR
Recognition)